In the past six weeks, the S&P 500 has swung by more than 2% on eight separate trading days — a volatility level that hasn’t been seen since the peak of the pandemic. The culprit? A creeping, corrosive lack of faith.
It’s the kind of sentiment that Darth Vader might recognise: “I find your lack of faith disturbing.” On Wall Street, that lack of faith is now directed squarely at the Federal Reserve’s ability to tame inflation and at the resilience of corporate earnings. The result is a market that lurches from hope to despair, often within the same hour.
Investor confidence, as measured by the weekly BullpenBrief Sentiment Index, has dropped to 28.6 — a level that historically precedes significant corrections. That reading, released Monday, is down from 45.2 in early January and marks the steepest three-month decline since the 2008 financial crisis.
The Confidence Crisis in Context
To understand why “lack of faith” is the defining theme of this market cycle, we need to look at the Federal Reserve’s dual mandate: maximum employment and stable prices. For the past year, the Fed has been fighting the worst inflation in 40 years, raising rates at the fastest pace since the 1980s. But the battle is far from won.
In March, the Consumer Price Index came in at 5.0% year-over-year, down from 6.0% in February but still well above the Fed’s 2% target. Core inflation, which strips out food and energy, actually ticked up to 5.6%. This “sticky inflation” narrative has shattered the belief that the Fed can engineer a soft landing.
“The market is essentially saying it does not trust the Fed’s ability to bring inflation down without breaking the economy,” said Dr. Margaret Lin, a professor of monetary economics at Georgetown University and a former Fed economist. “Every time we get a data point that suggests inflation is lingering, that faith erodes a little more.”
The lack of faith is not just about inflation. It’s also about the economic outlook. Second-quarter GDP growth is currently tracking at just 1.1% annualised, according to the Atlanta Fed’s GDPNow model. Corporate earnings have been lacklustre: of the 132 S&P 500 companies that reported first-quarter results as of mid-April, only 58% beat revenue estimates, compared with a five-year average of 67%.
Why a Lack of Faith Feeds Volatility
When investors lose faith in a core anchor — like the central bank or the earnings cycle — they retreat to short-term thinking. Holding periods shrink. Algorithms take over. Every data release becomes a do-or-die event.
Consider the reaction to the most recent Fed meeting on March 22. The Fed raised rates by 25 basis points, as expected. But Chair Jerome Powell’s press conference included a line about “some additional policy firming may be appropriate,” which sent bond yields spiking. The S&P 500 dropped 1.6% in the final hour of trading. Two days later, a surprise rise in jobless claims sent yields falling and stocks rebounding 1.4%. The whiplash was brutal.
“The market has lost its anchor of stability,” said James Houghton, chief market strategist at Baird & Co. in Milwaukee. “Investors were conditioned to believe the Fed would always be there to prop things up. That certainty is gone. And when faith cracks, volatility rushes in.”
Put it this way: imagine you’re crossing a bridge you’ve always trusted. But now you see cracks, and the structure sways with each gust of wind. You won’t cross calmly; you’ll either sprint or turn back. That’s exactly what institutional investors are doing — sprinting into cash or turning back to Treasuries, even though Treasury yields are volatile too. Money market funds have seen inflows of $312 billion year-to-date, the highest first-quarter accumulation on record.
The Real-World Ripple Effects
This lack of faith isn’t just a trading floor abstraction. It translates into higher borrowing costs for consumers and businesses. The average 30-year fixed mortgage rate ticked back up to 7.1% this week, after dipping to 6.4% in February. Corporate bond spreads have widened by 35 basis points since the start of March, making it more expensive for companies to raise capital.
For the average reader in the US, UK, or Canada, that means your pension or retirement savings are more volatile, your mortgage renewal could be shockingly higher, and your employer might think twice before expanding. The cost of lost faith is real and measurable.
A recent survey by the Royal Bank of Canada showed that 55% of small business owners expect the economic situation to worsen over the next six months, up from 42% in the fourth quarter of 2022. That’s a powerful indicator of lost faith at the grassroots level.
Can Faith Be Restored?
The key question now is what it would take to rebuild the trust that markets crave. Historically, faith returns when the Fed either convincingly defeats inflation or pivots to cutting rates. But the timeline for either is foggy.
“I think the market needs to see three consecutive months of core inflation below 4% before it starts to believe the narrative of a soft landing,” said Priya Sharma, a global macro strategist at Oxford Economics in London. “That probably means we are in for at least another two months of this faith deficit, and that means more volatility.”
Meanwhile, some are betting that the lack of faith itself will force the Fed’s hand. If stock and bond markets continue to deteriorate, and if the banking sector shows further stress (the collapse of Silicon Valley Bank in March was partly a faith crisis), the Fed may feel compelled to pause or even cut rates sooner than it currently signals. The futures market is currently pricing in a 35% chance of a rate cut by July, up from 5% a month ago.
But the danger of a premature pivot is that inflation reaccelerates — what economists call a “stop-go” cycle that undermines monetary policy credibility even further. That would be the ultimate loss of faith.
For now, investors, business leaders, and households are left to navigate a world where the most trusted institutions seem less trustworthy. The markets are a mirror, and what they reflect is unsettling. As one trader in New York put it dryly last week, “We’re all finding each other’s lack of faith disturbing.”
The coming weeks will be telling. With the Federal Reserve’s next meeting on May 3, and a slew of inflation and jobs data due before then, the faith test is far from over. Whether the central bank can restore confidence — or whether the market will continue to doubt its every move — will determine the direction of the global economy for the rest of this year.
